China Is Technically Defying US Iran Oil Sanctions But Many of Its Refineries Have Stopped Buying

Iran's total oil exports now down to just 20 percent of what they were before US withrew from the nuclear deal last year

Chinese imports from Iran went up in April as refineries stocked up on Iranian oil before waiver end, but since then many have stopped buying. Between that and the loss of every other importer aside from Syria (which is buying on credit) Iranian oil exports are down to 500,000 bpd, down from the 1,000,000 bpd Iran was exporting before May 2019 waiver end, and from 2,500,000 bpd it was exporting before May 2018 US exit from the Iran nuclear deal a reimposition of sanctions.

China’s crude oil imports dropped in May from a monthly record in April, as Chinese refiners drastically reduced Iranian oil imports after the end of the U.S. waivers and as some state refineries were offline for planned maintenance.

According to data from China’s General Administration of Customs, reported by Reuters, Chinese crude oil imports fell by 8 percent from 43.73 million tons in April to 40.23 million tons in May. This, converted in barrels per day, is an 11-percent drop from April to May, to average 9.47 million bpd last month, according to Reuters estimates.

According to Seng Yick Tee, an analyst with Beijing-based consultancy SIA Energy, the key reason for the lower Chinese crude oil imports in May was the sharp drop in imports from Iran as the U.S. ended all sanction waivers for Iranian customers on May 2, including for Iran’s biggest oil buyer China.

In April, just before the waivers ended, China had stocked on Iranian crude oil. China imported around 800,000 bpd of crude from Iran in April—the highest amount that Iran’s top oil customer had purchased since August of 2018—as Chinese refiners rushed to buy Iranian oil ahead of the expiry of the U.S. sanction waivers.

The surge in Iranian imports in April resulted in China setting a new monthly oil import record that month, despite the fact that there was refinery maintenance and fuel demand was lukewarm, analysts told Reuters at the time.

Apart from the sharp drop in Iranian imports and regular maintenance at several refineries, another factor for the decline in Chinese crude oil imports in May were the weak refining margins across Asia.

Although refiners in Asia are not left without choice for crude oil after the end of the U.S. sanction waivers for Iranian oil, the higher price of alternative supplies, as well as soaring fuel exports from China, are depressing refining margins across Asia.

Last month, reports emerged that persistent pressure on profit margins had forced Asian refiners to start considering a reduction in their run rates as Asia’s refining margins slipped to a 16-year low.

After the U.S. ended all sanction waivers for Iranian oil customers on May 2, Iran’s crude oil exports have been significantly down this month compared to April and more than 2 million bpd off their 2.5-million-bpd peak in April 2018, just before the U.S. withdrew from the Iran nuclear deal and moved to re-impose sanctions on Iran’s oil industry.

According to industry sources and tanker-tracking data cited by Reuters on Wednesday, Iran’s oil exports this month have plummeted to 400,000 bpd, which is less than half of Iranian oil exports last month.

The United States had given eight countries six-month waivers to continue buying oil from Iran after the U.S. re-imposed sanctions on the Iranian oil industry in November. The United States, however, pursued a maximum pressure campaign against Iran last month and put an end to all sanction waivers for all Iranian oil buyers, beginning in May.

Most of the Iranian oil shipments are going this month to Asia, according to tanker tracking data from Refinitiv Eikon and to two industry sources.

One of the sources told Reuters they expected Iran’s average oil shipments this month to be around 400,000 bpd, but the other source noted that exports could hit 500,000 bpd.

Some of Iran’s oil exports are believed to have been already under the radar as Iran is said to have increased the use of the ‘switch-off-the-transponder’ tactic, which makes tracking its exports via the AIS systems increasingly difficult and opaque.

Earlier this month, Iran was spotted resuming illicit shipping of oil to Syria, with a million barrels of oil arriving in early May, for a first such delivery since the start of this year. Experts believe that Iran will be re-opening and using more of its illicit oil channels to keep oil trade and continue getting some revenues from its most precious export commodity.

The inability to fully track Iran’s oil supply is making OPEC and allies’ task to asses global supply to the market increasingly difficult, as opaque data about Iran adds to mounting uncertainty over oil supply disruptions elsewhere, clouding OPEC’s outlook on global supply for the rest of this year.